The Fed Is Walking The Bond Yield Tightrope

Dec. 15, 2010 3:54 PM ET

Since the Federal Reserve Bank announced it's $600 billion quantitative easing program on November 3rd, 2010 yields on the 10 and 30 Year Treasury Notes have soared higher. On November 4th the 10 Year Treasury yield was around 2.46 percent and the 30 Year Treasury yield was around 3.85 percent. Since that time the 10 Year T- Bond yield jumped by more than a full point and is now trading around 3.55 percent. The yield on the 30 Year T-Note is now around 4.60 percent. This is a major increase in interest rates in just a short amount of time. Is this what the Federal Reserve was aiming for for when they announced QE-2? The whole point of QE-2 according to Ben Bernanke was to keep rates artificially low to try and stimulate the housing and job markets.

Since the stock market made a low in March 2009 from the 2008 financial crash yields have remained in this wide range. It seems that 4.00 percent is the magic number on the 10 Year Bond Yield. Remember the 10 Year Bond is what effects mortgage rates and this is the one area that has been a problem for the Fed. Should the 10 Year Bond yield move above the 4.00 percent level that is where the stock market could face trouble. The last time the 10 Year T-Note hit 4.00 percent that is when the stock market faced a major correction. Therefore, until that level is reached I'm sure the Fed is still feeling comfortable. The magic number for the 30 Year T-Note seems to be around 4.85 percent. This was also the April highs for the yield and that is where the stock market retreated sharply and moved into a 16.0 percent correction.

It has always been said that the bond traders are smarter than the stock traders. I'm not so sure about that, however, the bond money is where the central banks play and that is certainly the reason that the bond market effects stocks. Investors and traders should watch the magic levels on the yields as they near the danger zones. Remember a sharp yield curve is usually positive for the banks when they lend money. These banks are really not in that business anymore. They are in the business of borrowing free from there friends at the Fed. In turn they buy U.S. Treasuries, stocks, and operate their credit card business. Therefore, danger lurks if these yields move to high. You have been warned.